January 25, 2010

Top Stories: Currencies

Jan. 25 (Bloomberg) -- The following are the day's top storieson currencies:

Yen Declines on Speculation Bank of Japan is Prepared to Enact MoreEasing The yen fell against the dollar and the euro amid speculation Bank of Japan policy makers are prepared to increase purchases of government debt to safeguard the recovery and limit the currency's strength. Japan's currency snapped seven days of gains against the euro after people with knowledge of the matter said the central bank may also expand an emergency-loan program for banks as it seeks to stave off deflation. The yen and the dollar dropped against higher-yielding currencies on speculation Federal Reserve Chairman Ben S. Bernanke will win lawmakers' support for a second term. The dollar declined before a report that may show sales of existing U.S. homes dropped last month. ``There's still this whole debate about whether Japan will accept a strong yen and I think it won't,'' said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt. ``They will intervene if they feel the yen starts to accelerate too much.'' The yen depreciated to 127.39 per euro at 8:26 a.m. in London from 126.98 in New York last week. It weakened to 90.06 per dollar, from 89.82. It traded at 89.79 on Jan. 22, its strongest level since Dec. 18. The dollar was at $1.4141 per euro from $1.4139, after appreciating to $1.4029 on Jan. 21, its best level since July.

China May Raise Value of Yuan 5% in One-Time Move, Goldman's O'NeillSays China will probably let its currency appreciate by at least 5 percent in a one-time move and raise interest rates to cool the economy and curb inflationary pressures, Goldman Sachs Group Inc. Chief Economist Jim O'Neill said. The Chinese government may allow the yuan to have ``a bigger one-off move than people talk about, at least 5 percent, maybe more,'' O'Neill said in an interview today at the London School of Economics. ``They may also consider having a wide band to let it move more frequently on the daily basis to stop speculative players.'' China's economy rebounded stronger than anticipated in the fourth quarter, and the inflation rate accelerated to a 13-month high of 1.9 percent in December, igniting speculation the government will abandon the yuan peg to avoid the economy from overheating. China has kept a lid on its currency since July 2008 after it strengthened 21 percent against the dollar over the previous three years. ``Part of the idea of doing these things is to surprise people so we are not going to get any hints of it happening,'' said O'Neill. ``We'll just wake up on an unpredictable day and see it happen.''

Pound Perceived as Diminished Currency No Matter Who Wins in U.K.Election No matter who prevails in this year's election between U.K. Prime Minister Gordon Brown and opposition leader David Cameron, the loser will be the pound because the next government may not have enough support in parliament to rein in the Group of 20's biggest budget deficit. Strategists cut forecasts on sterling versus the dollar by as much as 2 percent this month to the lowest since June. The currency will be weighed down by polls that point to the first parliamentary stalemate in a generation, growth that lags behind the four biggest industrialized economies and a fiscal shortfall that has ballooned to almost 13 percent of gross domestic product, double what it was a year ago, the strategists said. SJS Markets Ltd., last year's second-most accurate forecaster on the pound versus the dollar, sees the U.K. currency falling 1.3 percent by Dec. 31. BNP Paribas SA says the pound will wipe out all of last year's 11 percent gain, its best since 2006. The last time a U.K. election failed to produce a clear winner was in 1974. The currency fell 28 percent in the next two years as the government's failure to fund its deficit led to an International Monetary Fund bailout. ``If you end up with political paralysis in the U.K., that would be the worst of both worlds, where no one governs and everybody is fighting each other,'' said Sebastien Galy, a New York-based senior foreign-exchange strategist at BNP, which sees the pound sinking to $1.40 this year. ``It's not a happy time when you have to go through fiscal restraint as it makes nobody happy, and if you do it with a weak majority or weak type of coalition, it's not easy to sustain.''

Argentine Peso Rally Ending as Fernandez Seeks Cash, Morgan Stanley Says The four-month rally in the Argentine peso is poised to end because the government will seek a weaker exchange rate to boost payments of profits from central bank foreign reserves, Morgan Stanley said. The devaluation incentive will lead the bank to break the longest peso rally since early 2007 and push the currency down 9.5 percent to 4.2 per dollar by year-end, said Daniel Volberg, a Morgan Stanley economist in New York. A drop that big would increase the peso value of the nation's $48 billion of international currency reserves and result in about $5 billion being handed over to the government, he said. ``That would significantly boost Argentina's financing,'' Volberg said in a telephone interview. Argentina's financing needs will climb to $11.4 billion this year from $10.7 billion in 2009, according to estimates by Credit Suisse Group AG. President Cristina Fernandez de Kirchner is seeking to restructure $20 billion of defaulted debt that creditors held out of a 2005 restructuring in a bid to regain access to international markets. To help finance payments, she also proposed taking $6.6 billion of central bank reserves, a plan that central bank President Martin Redrado has opposed.

Brazil's Real May Gain Versus Yen on Rate Increase, Mitsubishi UFJ Says Brazil's real may strengthen against the yen and dollar as a V-shaped recovery in the nation's economy this year prompts the central bank to raise interest rates, according to Mitsubishi UFJ Securities. Brazil's central bank will increase its benchmark interest rate from 8.75 percent as growth is likely to ``accelerate to the mid-5 percent level this year from a little over 0 percent in 2009,'' Hiroyuki Omiya, a New York-based executive director at Mitsubishi UFJ Securities, said in an interview in Tokyo last week. ``Brazil has a phobia of inflation due to its deep-seated memories of hyperinflation,'' Omiya said. The central bank should reverse half of the 5 percentage points in rate cuts it enacted during the financial crisis, he said. Brazil's inflation is currently below the government's target range of 4.5 percent plus or minus 2 percentage points. The real advanced against all of its 16 major counterparts in 2009, climbing 33 percent against the dollar and gaining 36 percent versus the yen, according to Bloomberg data. ``We are getting more inquiries from Japanese investors about real-based exchange rates,'' Omiya said.

Economy in U.S. Probably Expanded by Most in Four Years on FactoryPickup The U.S. economy probably grew in the closing months of 2009 at the fastest pace in almost four years as factories stepped up production and companies purchased new equipment, economists said before reports this week. Gross domestic product expanded at a 4.6 percent pace from October through December, more than double the prior quarter's growth rate and the strongest since the first three months of 2006, according to the median estimate of 74 economists surveyed by Bloomberg News. Other reports may show orders for durable goods increased and home sales declined. Manufacturers such as Intel Corp. are leading the recovery as growing demand and dwindling inventories prompt companies to speed up assembly lines. Slower consumer spending after the third-quarter's ``cash for clunkers'' rebound is a reminder that 10 percent unemployment is causing Americans to hold back, one reason why the Federal Reserve may keep interest rates low. ``Inventories are going to be responsible for at least half of the growth, if not more,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``There's been an enormous amount of government stimulus that will be fading as we go through the year, so it's unclear how much the economy can do on its own.''

Canadian Currency Touches Weakest Level in a Month as Risk AppetiteFades The Canadian currency weakened the most since October as uncertainty over U.S. banking regulations, China's monetary policy and Greece's finances dulled investors' appetite for higher-yielding assets. Canada's dollar fell against most of its major counterparts as stocks tumbled and crude oil, the nation's biggest export, dropped. The Bank of Canada kept interest rates at a record low and repeated concern that the currency's strength is hampering the nation's economy. Gross domestic product grew in November for a third month, a report is forecast to show next week. ``Quite simply, the market was extremely long Canada,'' said Michael O'Neill, managing director at Knightsbridge Foreign Exchange Inc. in Toronto. A long position is a bet a currency will appreciate. ``The fact there was a bit of risk aversion coming back into the market because of the Obama tax on banks, plus will-China-keep-tightening, that all put Canada in a bit of a negative light.'' The Canadian currency, nicknamed the loonie, depreciated 2.7 percent, the most since the five days ended Oct. 30, to C$1.0578 per U.S. dollar yesterday in Toronto, compared with C$1.0291 on Jan. 15. It gained 16 percent last year. One Canadian dollar buys 94.54 U.S. cents.

Peru's 30% Currency Futures Tax on Foreigners to Dry Up Trading, RBSSays Peru's tax on foreign investors' profits from short-term currency futures will dry up trading in the sol, RBS Securities Inc. said. The 30 percent tax on contracts maturing up to 60 days, which takes effect today, is part of changes to a decree issued last month that included a capital gains tax on stocks. ``This new legislation will be negative in as much as it dries up market activity and directs interest away towards currencies that still enjoy less interference,'' Flavia Cattan- Naslausky, a currency strategist at RBS in Stamford, Connecticut, wrote in a report today. The sol dropped 0.1 percent to 2.8525 per dollar at 3:50 p.m. New York time from 2.8495 yesterday. The currency has strengthened 1.2 percent this year after an 8.5 percent jump last year, its biggest annual advance since its creation in the 1990s. RBS forecasts the sol will slide to 2.9 by year-end.

ECB Has `Steady Hand' Approach on Liquidity Withdrawal, Nowotny TellsFT The European Central Bank will operate a ``steady-hand approach'' in its move to gradually withdraw extraordinary liquidity measures, and there is no need for banks to be nervous, European Central Bank Governing Council member Ewald Nowotny said in an interview with the Financial Times. The ECB sees neither ``an inflation or deflation perspective,'' and the central bank doesn't see ``a risk of bubbles emerging in the eurozone,'' he said. A pick-up in western European export markets is helping central and eastern European economies to recover faster than expected and some may profit in an ``over-proportional way'' due to their competitive advantages, he said, the FT reported.

South African Central bank Set to Keep Interest Rates on Hold: This Week South Africa's central bank will probably leave its benchmark interest rate unchanged tomorrow as a recovery in Africa's largest economy gathers pace and inflationary pressures abate. The bank will keep the rate at 7 percent, according to 20 of 22 economists surveyed by Bloomberg. The decision will be announced soon after 3 p.m. in Pretoria. The Reserve Bank reduced the key rate by 5 percentage points in the nine months through August after the economy fell into its first recession in 17 years. Growth resumed in the three months through September, with gross domestic product expanding an annualized 0.9 percent as manufacturing recovered. ``The central bank probably feels it has responded enough'' to the recession, said Kevin Lings, an economist at Stanlib Asset Management in Johannesburg. ``We are already at the bottom of the interest rate cycle.''

Russian Ruble Weakens to 2010 Low Against Dollar as Oil Falls Below $75 The ruble declined to its weakest level against the dollar this year and fell the most in almost a month versus the euro as oil, Russia's biggest export, traded below $75 a barrel. The Russian currency depreciated 0.9 percent to 30.1398 per dollar by 10:29 a.m. in Moscow, the weakest since Dec. 30. It fell 1.1 percent, the biggest drop since Dec. 29, to 42.6350 per euro. Oil traded near a one-month low as expectations of interest-rate increases in China dented investor confidence in the strength of the global economic recovery. Crude for March delivery was little changed at $74.57 in New York after dropping 2 percent on Jan. 22, the lowest settlement since Dec. 22. The movements against the dollar and the euro left the ruble at 35.7898 against the central bank's target currency basket, which is used to manage swings that hurt Russian exporters.

Hungary to Pace Interest Rate Cuts to Ward Off Forint Risk, Survey Shows Hungary's central bank may slow the pace of interest rate cuts this year as the European Union's most indebted eastern member balances policy to address currency risks against the deepest recession in almost two decades. The Magyar Nemzeti Bank will lower the benchmark two-week deposit rate three quarters of a point to 5.5 percent by the second quarter, according to the median estimate of 10 economists in a Bloomberg survey. Policy makers will cut the rate a quarter point to a record low 6 percent at today's meeting, 16 of 19 economists said in a separate survey estimate. Three expect a half-point reduction. Hungary is emerging from its worst economic crisis in 18 years, which culminated in a 7.5 percent annual contraction in the second quarter and forced the country to turn to international donors for a $30 billion loan. At the same time, government debt will this year swell to 79.8 percent of gross domestic product, more than double that in neighboring Romania and Slovakia, restricting the scope for interest rate cuts as investors demand higher returns to compensate for credit risks. ``This has been a quite aggressive rate-cut cycle,'' Bartosz Pawlowski, an emerging-market strategist at BNP Paribas SA in London, said in a telephone interview. ``What the central bank is doing is a fine balancing act between what the economy calls for and what investors require in risk premium due to the country's very high level of indebtedness.''

Australian, New Zealand Dollars Gain on Speculation Bernanke to Keep Job Australia and New Zealand's dollars gained the most in about three weeks versus the yen as demand for riskier assets rose on speculation Federal Reserve Chairman Ben S. Bernanke will be confirmed for a second term. The so-called Aussie also rose before a Jan. 27 report economists said will show annual inflation accelerated in the fourth quarter, boosting prospects the central bank will raise interest rates next month. U.S. President Barack Obama received assurances from Senate leaders that Bernanke will be confirmed, an administration official said. ``Risk has bounced a little on Bernanke's potential reappointment looking more likely,'' said Tony Allen, head of currency trading at ANZ National Bank Ltd. in Wellington. Australia's currency rose 1 percent, the most since Jan. 6, to 81.70 yen as of 3:51 p.m. in Sydney. It gained 0.7 percent to 90.68 U.S. cents from New York's closing level on Jan. 22. New Zealand's dollar climbed 1.2 percent, the most since Dec. 29, to 64.50 yen. It added 0.9 percent to 71.59 U.S. cents.